Analyst Says Quality Portfolios a Boost to Office REITs

Reagan covers the office sector for Green Street. He discussed the sector’s adaptability in light of the difficult market conditions that have held sway since the Great Financial Crisis.

“There’s no question that it has been tough sledding in the office sector over the past few years,” Reagan said. “This recovery has been one of the slowest ones we’ve seen in recent recoveries. That is largely a function of the very poor job growth climate that we’ve seen out there. What has made things worse for the office sector is that office tenants are really in efficiency mode. They’re getting much tighter with their office space usage, and so the little job growth that we have seen has not translated into office demand in a meaningful way.”

According to Reagan, high-quality portfolios have helped office REITs cope with the tough economic terrain.

“Office REITs are actually faring relatively well in this environment,” he said. “They’re seeing slow but steady occupancy growth. The REITs that are doing best are those that have exposure to energy- and tech-driven markets, such as San Francisco or Austin or Houston.”

Reagan said the office sector appears to be fairly valued in the market right now.

“Historically, office REITs actually tend to underperform most other major property types, both in the private and the public markets,” he said. “If you look back over the past 13 years or so, office REITs have underperformed the broader NAREIT index for 10 of those 13 years. The sector is a tough business with high capital needs, a lower NOI growth profile and an ease of new supply. That said, as we look at the office market today, it does appear to be fairly priced.”

Reagan cited the health of the New York office market as one of the key storylines to follow in the second half of 2012.

“Manhattan is the largest and most important U.S. office market,” he said. “It has generally been pretty stagnant over the last few years, but there are signs now that may be changing. There’s some momentum building, both in terms of fundamentals and asset value appreciation.”

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NAREIT®, the National Association of Real Estate Investment Trusts®, is the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate and capital markets. NAREIT's members are REITs and other businesses throughout the world that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service those businesses.